The Age of Rage: Trump's War on Everyone

How Should the Good Guys Respond?

In the last few weeks, Trump has launched a trade war against Canada, Europe, Mexico and China, and rejected the advice of US security agencies in favour of private discussions with Putin. Meanwhile, after two years of discussing how to implement Brexit, UK politicians still appear to have little idea what leaving the EU will mean for Britain.  It seems certain that challenging times lie ahead for many economies.

If Trump's own team have little ability to influence how America's president conducts business and the statements he makes, how can companies and countries find a way to continue to do business?

In a fascinating contrast with my recent visit to Beijing (see Today the War Began), I spent part of last week participating in the Australia Canada Economic Leadership Forum in Montreal, Canada. These are two of the largest second tier economies by nominal GDP, ranking 10th and 14th respectively. Both have strong domestic economies, excellent social welfare provision, strong financial institutions and are highly multi-cultural. Both emerged from the financial crisis almost entirely unscathed, and Australia has been amongst the fastest growing developed countries for several decades. 

How these countries respond to the newly hostile trade environment provides important lessons for every other developed economy

Both countries have significant reliance on exports to the largest countries in the world (Australia to China, and Canada to the USA). So how these countries respond to the newly hostile trade environment provides important lessons for every other developed economy.

Despite their historic economic performance, storm clouds are gathering. Around three quarters of all of Canada’s exports are delivered to the United States, highlighting the significant threat posed by Trump’s War on Everyone. Meanwhile, though Australia has prospered from strong exports to China and steady growth in its own population, the large majority of the top 100 companies are old economy businesses, and many face significant risks from new competition enabled by new technologies. 

The discussions at the forum highlighted various important challenges. As with many other countries, despite moderate economic growth, real wage growth remains elusive, and governments continue to run significant deficits. The effects of climate change are being felt in significant weather-related catastrophes, not to mention wide-spread damage to the barrier reef. Infrastructure investment remains well below optimal levels, and domestic politics has become unhelpfully febrile. Overseas, political risk is clearly increasing, exacerbated by what looks likely to be the largest trade war since the Great Depression.

Globalisation may have been a boon for resource and commodity exporters like Australia and Canada, but in most Western nations, many people have been left behind, as the benefits of productivity gains have been channeled largely or entirely to shareholders (the Nordic countries are a notable exception). This has created a fertile environment for radical populist politicians from both sides of politics, increasing the risk of disruptive political change and displacement of the politic elite. In two short years, the UK voted for Brexit, Trump was elected in the USA, Macron won at the head of an entirely new party in France, and Corbyn almost displaced May in the UK.

Like Trump himself, these issues are a symptom, not the cause.

Like Trump himself, these issues are a symptom, not the cause. Whilst blaming China or immigrants for displacing domestic jobs is an easy political shot, industrial automation and computerization are the real culprits. Though Trump’s physical trade war is new, a digital trade war has been under way for two decades, in which the USA and China have already comprehensively outmaneuvered every other country. In particular, nearly all the most successful tech companies of the last twenty years are based in the USA and China.

A couple of months ago, New Zealand’s premier Jacinda Ardern joked that her country was disappearing from world maps. As the image below shows, Australia and New Zealand simply don’t appear on the world start-up map at all. 

So, what must be done, to create new opportunities for employment and economic growth?

Recognise the challenges

First, the biggest challenge is to recognise the true severity of the underlying challenges. This is particularly hard when life is as comfortable as it is for many people in Australia and Canada. Unemployment is relatively low, public education and healthcare are excellent, and physical infrastructure is generally in good condition. They are home to six of the world’s most livable cities, as ranked by the Economist Intelligence Unit. After nearly three decades of uninterrupted growth, the large majority of the Australian workforce has no first-hand experience of a recession at all.

Nevertheless, the underlying problem of cross-border wealth polarisation is a serious problem, notwithstanding Australia’s growth, as it means that the new job opportunities and associated value creation are concentrated offshore. 

A revolution in mindset needs revolutionaries to lead the charge, so we urge those who have understood these risks to speak up and make sure their voices are heard. More broadly, don’t settle for qualitative assurances that new jobs will magically appear to replace those that are lost. A fourth industrial revolution is now unfolding. Over the next several decades, the Robot Revolution will result in at least half of all jobs being replaced by machines, dramatically reducing employment opportunities, without intervention to ensure some of the benefits flow to workers rather than shareholders.

Contrary to popular belief, quantitatively this is not what has happened in previous revolutions. History shows that, left entirely to free markets, shifts of this nature create incredible social pain and disruption, including the polarisation of wealth seen in the US over the last fifty years (see The Future of Society for more detailed analysis of this issue). As one participant commented, “the role of companies is to stay in business and create employment”. We see the latter becoming dramatically more important over the next decade.

Diversify trading partners

Second, it is essential that countries diversify their trading partners, including reducing dependence on the USA whilst ensuring a healthy balance of trade with China and other high growth nations. From an Australia/Canada perspective, this means increasing trade and investment flows between the two countries, and/or working together to expand trade and investment into third countries. Both Australia and Canada have already started to do this through the Trans Pacific Partnership trade deal.   

Ultimately companies must drive these new investments and trade flows. In this context, it was notable that just four of Australia’s ASX 100 companies attended the forum, three of whom already have extensive international businesses. Even fewer attended the APEC China CEO Forum the previous week. Much greater focus on offshore expansion opportunities is essential. We recognise the significant challenges of offshore expansion – abject failures such as Woolworths poorly executed foray into the UK, ANZ’s vague promise to generate 20% of its profits in Asia and BHP’s painful shale gas acquisitions in the USA attract much more attention that global success stories.

Companies such as Cochlear, Flight Centre, Rode Microphones and Servcorp illustrate that it is possible for relatively young Australian companies to build large scale, leading businesses on the world stage. Meanwhile Canadian and Australian pension funds have been amongst the leading investors in large scale infrastructure projects globally. 

Meanwhile, most Aussies know Baker’s Delight as a store on the high street, but it also operates a successful franchise system in Canada too. And start-ups like Atlassian have been built international from the outset – it now has a market value of US$15bn and would rank approximately 15th on the ASX if it had been listed there. These stories of success are important and should attract much more attention.

Act with urgency

Third, simply talking about these issues will have no economic impact, no matter how interesting the discussion. Nor, for that matter, will talking about the need for action (or writing about it, as this author is acutely aware). By the time of the next Australia Canada forum, in early 2020, we would hope that numerous companies will be able to share case studies of successful business expansion initiatives. Countries and companies need to lift their expectations and ambitions, and act with a real sense of urgency over the months that lie ahead.

This means developing carefully considered market entry and long-term business growth strategies. In some cases, businesses will have pre-existing operations that provide a potential basis for building a much larger business. In others, you may own a business which provides a logical launch-pad for building a much bigger business in one or more offshore markets. 

Either way, strategic development requires an imaginative approach that combines traditional business development activities with using new technologies and/or new business models to create opportunities that can be scaled widely and rapidly. This is much more easily said than done, but this should not be used as an excuse to rest on your laurels. Numerous start-ups have demonstrated that billion-dollar businesses can be built rapidly with the right vision and objectives, even in direct competition with much larger, better-resourced and better-financed incumbents.

In grappling with these challenges, remember that hope is not a strategy, and fear is not a plan. One common thread runs through all of this, which is the importance of coupling long-term thinking with the right short-term actions. So, if you are to navigate the significant risks of business diversification, particularly across borders, keep these six key points in mind.

1.     Look far ahead! In the face of rapid technological change and an unpredictable geopolitical environment, establish where the long term strategic high ground lies, and align every investment with reaching that goal. Whilst this may steam daunting, remember that certainties abound. For example, China will overtake the US economically at some point in the next decade or so – the precise year is uncertain, but the outcome is not. In our experience, long term thinking is a perfect antidote to the challenges of rapid near-term change. 

2.     Find the right strategic destination! Many companies talk of strategic direction, and indeed shift focus on a surprisingly regular basis. All too often this means that the end objective is not clearly defined, or in some cases even defined at all. To use a sailing analogy, a crew participating in a long-distance yacht race has no idea precisely what course they will plot, but absolute certainty regarding the end destination they are trying to reach (for more colour on this, see our piece The Accidental Circumnavigation of Sark). If you establish the right strategic end destination at the outset, you will save yourself a huge amount of time, effort and money by avoiding the distractions along the way.

3.     Invest offshore! For both Australian and Canadian companies, diversifying your reach remains more important than ever. For Australians in particular, keeping all your economic eggs in a domestic basket has delivered mixed results over the last 20 years, and the same is likely to be true over the next decade too. For many businesses, and especially larger businesses, this means that adapting your business and your business model to offshore markets is more important than ever. In doing so, remember that expanding a small market position in a large offshore market can deliver much more absolute growth than modest increases in your home market. This is true even in economies such as Japan, where the economy as a whole is barely growing at all.

4.     Invest for impact! Where you are entering new markets or exploring new technologies, there is significant advantage in investing small amounts of money in opportunities that have potential to create very substantial value long term. Investments like this can be leveraged with time, allowing the magic of strong compound growth in a new market work its magic, and avoiding the significant downside risk of a big investment in a region or segment that you do not know well. Be wary of ignoring opportunities just because they are too small as measured by the amount of investment they require today.

5.     Plan for the future! Develop your strategy so that you skate to where the puck is going to be, not where it’s come from. Make sure you understand both the direction and likely extent of change in any particular industry and country and be suspicious of experts who are overly confident in the status quo. Similarly, be very wary of those who make claims along the lines “that would never work here”: all too often this reflects a lack of their own understanding and vision, rather than a lack of genuine opportunity. Australia has seen the latter in the form of horribly ill-informed discussion of the relevance of high speed rail and fibre-to-the-home internet networks, notwithstanding hosting the world’s fourth busiest air route (Sydney – Melbourne) and being of the most urbanised countries in the world and thus ideally suited to launching next generation telecommunications infrastructure.

6.     Choose advisors carefully! There are endless case studies of international expansion strategies that have failed, and large cross-border M&A transactions that have gone spectacularly wrong. In many cases, the reasons for these disasters could reasonably have been seen clearly in advance. So, look for advisors who have lived and breathed other markets first hand, and who are at least as good at advising “No!” as they are at negotiating deals. And make sure that you scrutinise their entire track record, not just the handful of case studies cherry-picked for their pitch to you.

As you reflect on the urgency to act, contrast the discussion in Montreal about the challenges and opportunities with descriptions of action in Beijing, where many presentations described what the companies concerned were already doing to seize the opportunities, from digital commerce to electric vehicles and much more beyond.

We are mindful that many countries don’t have the same intrinsic strengths as Australia and Canada. This emphasizes both the advantages that Australian and Canadian companies have in pursuing these opportunities, as well as the urgency to act irrespective of where you are based.

Where to from here? Wherever you are, Trump’s War on Everyone poses significant risks to global growth, increasing the risk of economic disruption and radical political change. New technologies create new openings and new dangers in equal measure, and the unfolding Robot Revolution will drive substantial shifts in the nature and location of employment. In this brave new world, old thinking looks more and more like a recipe for disaster. In contrast, as we’ve demonstrated to our clients and in our own business, with a fresh perspective and a more holistic consideration of where the best opportunities lie, phenomenal results can be achieved in surprisingly short time frames. If you’d like to explore how we can help you find the silver lining in the storm-clouds that are gathering, please let us know!

Nigel Lake is Executive Chair and co-founder of Pottinger. Follow me on Twitter here.